Unsanitized: Government Gives out Negative $3 Billion in PPP Loans in Three Weeks

What’s happening to the small business loan program. This is The COVID-19 Daily Report for July 18, 2020.

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First Response

On June 30 the Paycheck Protection Program expired. At the time the Small Business Administration listed on its website that the program had delivered $521.4 billion to over 4.88 million borrowers. This was far less than the $670 billion provided by Congress for the program. If you sub out the bank fees there was still over $130 billion left on the table.

Then a great miracle happened. Senate Democrats offered an extension of the program to August 8, and Republicans accepted it. The extension sailed through the House and was signed by the President. Now all small businesses locked out or confused by the program would have several weeks more to get their piece of that $130 billion. The August 8 deadline was strategically placed, as it lined up with the last day of the Senate’s work session for the summer; whatever would happen with the PPP would fold seamlessly into a new coronavirus response bill. But in the meantime, businesses could get the loans they need.

Here’s how that’s going. As I said, on June 30, PPP had given out $521.4 billion in loans. As of close of business on Friday, July 17, PPP had given out… $518.2 billion.

Some of this reflects loans given back after the revelations of who got them in early July. (Those revelations are continuing; scam companies running Ponzi schemes and other bad actors received large loans, for example.) And without a doubt, very little that the SBA releases statistically should be trusted as precise. But even factoring all that in, a program aimed to get money out to businesses who need it delivering negative $3 billion in almost three weeks is not, let’s say, a national model of efficiency. And this is a time where coronavirus surges have led to more shutdowns and uncertainty for local businesses.

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You’d think free money from the government would be easy to hand out. (And increasingly, it does appear that it will be free money; Treasury Secretary Mnuchin floated this week that the 86 percent of the loans under $150,000 should just be automatically forgiven, a concession to reality; there’s no capacity in the SBA to process loans, let alone audit them.) Why exactly are we talking about a “next round” of PPP funding when there’s seemingly no ability to unload the rest of this round?

I don’t really know what to make of this, but let me suggest a few things. Banks really ramped up their efforts to process loans in the initial flood of PPP applications. Those efforts have spun down. You’d have to be pretty knowledgeable to know that there’s any PPP money left, and you’d have to find a bank willing to execute that loan. Nobody’s really advertising that willingness.

Second, small businesses typically have weeks, not months, of reserves, and PPP really offers little for their survival, with most of it being a pass-through to employees. If you didn’t get your loan in April you’re probably not around in July, or you’ve managed to stick around through some jury-rigged miracle that would not be aided by PPP in its current form. So demand is clearly gone.

Congress is discussing using the next bill to allow companies with severe revenue shortfalls to apply for a second round of PPP support; restaurants might be prime candidates. But the fact that the odometer is running backwards should trigger some introspection into what this program actually accomplished.

Amanda Fischer of the Washington Center for Equitable Growth has an issue brief on that subject, finding that the frequency of loans depended on the makeup of banks in the area (something this space has stressed), meaning that areas hard-hit by the virus did not correlate with high levels of PPP recipients. Community banks saw PPP as an opportunity, and big banks saw it as a chore. That, more than anything, drove the response. Areas with high levels of community banks are likely exhausted of businesses needing funds, and therefore demand has crashed.

Fischer concludes that PPP “was a successful liquidity backstop for firms that may have needed marginal help meeting payroll during the worst of the mandatory lockdowns, but it did not prevent layoffs.” Funding rolled out disproportionately to firms already inclined to keep workers on staff. That’s a damning assessment that should call into question what the point of this exercise was.

A universal program of payroll support that kept workers attached to employers while keeping them out of harm’s way would have been far more sensible; likewise with wage subsidies and shared-work programs. Maybe a program that offered support for actual small business needs, like plexiglass shields and other coronavirus response measures, or one that gave higher percentages for overhead costs in high-rent areas like big cities, would have made sense. Cutting banks out of the delivery mechanism certainly would have been better. And of course, the best policy action for small businesses would entail actually suppressing the virus.

The actually existing PPP does none of these things (and don’t even get me started about the SBA’s disaster loans, which are aptly named because many businesses approved for them didn’t even get them). With the program going backwards, it’s time to radically rethink our response.

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